Tài liệu The Economic Value of Higher Teacher Quality pdf

URBAN INSTITUTE
The Economic Value
of Higher
Teacher Quality
E r i c H a n u s H E k
w o r k i n g p a p e r 5 6 • d e c e m b e r 2 0 1 0









The Economic Value of Higher Teacher Quality

i

Contents


Acknowledgements ii

Abstract iii

Introduction 1

The Central Importance of Teachers 3

Problems with Current Teacher Policies 6

Current Certification Policies 6

Current Salary Policies 8

What is the Economic Value of Quality Teachers? 12

The Demand Side Based on Expected Student Earnings 13

The Demand Side Based on Aggregate Economic Growth 21

Costs and the Timing of Benefits 23

Policy Conclusions 26

References 29

Tables 35

Figures 38







ii

Acknowledgements


The research presented here benefitted from extensive and insightful comments by Martin West.
Valuable research assistance was provided by Lorra de la Paz. This is a revised version of a paper
originally prepared for the conference on "Merit Pay: Will it Work? Is it Politically Viable?" sponsored by
Harvard's Program on Education Policy and Governance, Taubman Center on State and Local
Government, Harvard's Kennedy School, 2010. The author gratefully acknowledges the National Center
for the Analysis of Longitudinal Data in Education Research (CALDER) funded through Grant
R305A060018 to the Urban Institute from the Institute of Education Sciences, U.S. Department of
Education for supporting this research.

CALDER working papers have not gone through final formal review and should be cited as working
papers. They are intended to encourage discussion and suggestions for revision before final publication.

The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that
examines the social, economic, and governance problems facing the nation. The views expressed are
those of the authors and should not be attributed to the Urban Institute, its trustees, or any of the
funders or supporting organizations mentioned herein. Any errors are attributable to the author.

CALDER, The Urban Institute
2100 M Street N.W., Washington, D.C. 20037
202-261-5739 • www.caldercenter.org

iii

The Economic Value of Higher Teacher Quality
Eric A. Hanushek
CALDER Working Paper No. 56
December 2010





Abstract

Most analyses of teacher quality end without any assessment of the economic value of altered teacher
quality. This paper combines information about teacher effectiveness with the economic impact of
higher achievement. It begins with an overview of what is known about the relationship between
teacher quality and student achievement, which provides the basis for consideration of the derived
demand for teachers which comes from their impact on economic outcomes. Alternative valuation
methods are based on the impact of increased achievement on individual earnings and on the impact of
low teacher effectiveness on economic growth through aggregate achievement. A teacher one standard
deviation above the mean effectiveness annually generates marginal gains of over $400,000 in present
value of student future earnings with a class size of 20 and proportionately higher with larger class sizes.
Alternatively, replacing the bottom 5-8 percent of teachers with average teachers could move the U.S.
near the top of international math and science rankings with a present value of $100 trillion.

iv

1

Introduction

It has become widely accepted that high quality teachers are the most important asset of schools, but
this recognition has not led to any consensus on the appropriate policies that should be followed to
ensure that we have a good stock of teachers. The policy proposals range quite broadly, although
generally they call either for closer regulation of quality or for more use financial incentives with little in
between these two poles. Remarkably, these policy deliberations seldom include even the most
rudimentary economic analyses or evaluations. The focus of most educational policy research and of
the majority of public discussions of school policy is simply whether or not some school input has a
significant positive impact on student achievement and not what it might cost or the economic benefits
it might produce.
1
This paper focuses on the demand side of the teacher labor market in the United
States and provides baseline estimates of the economic value of improving teacher quality.
Much of the discussion about the potential demand for teachers is framed in terms of ensuring
sufficient numbers of trained teachers. This, however, is not really the issue, because the U.S. has have
for a long time trained considerably more teachers than the number of positions that annually become
open in schools. For example, in 2000 86,000 recent graduates entered into teaching, even though
107,000 graduated with an education degree the year before (see Provasnik and Dorfman 2005; U.S.
Department of Education 2009).
2
At the same time, many have noted shortages of teachers in particular


1
One notable exception is the long term emphasis by Henry Levin and his co-authors on comparing benefits and

costs, although this has not developed much traction in policy debates. See, for example, Levin and McEwan
(2001) and Belfield and Levin (2007). An early attempt at benefit-cost analysis in the case of class size reduction is
found in Krueger (2002), following a conceptually similar approach to one part of the analysis below.
2
Note that the recently graduated group entering teaching also includes a number of people who graduate with
degrees other than in education, making the excess supply of education graduates even larger. Similar
differentials existed throughout the 1990s, implying that the stock of trained teachers not in the teaching
profession is substantial.
2

geographic regions or subject areas, such as math, science, or special education.
3
What usually gets left
out is anything to do with quality.
4

The analysis presented below is built on a simple premise: The key element defining a school’s
impact on student achievement is teacher quality. In turn, the demand for teacher quality is derived
from just this impact of teachers on student outcomes. Both existing academic studies and the related
policy discussions devote little thought to the economic value of outcomes, generally relying on the
vague notion that higher scores on tests are better than lower scores. This analysis puts outcome gains
in economic perspective.
Consideration of the economic value of teacher quality is especially relevant for the debates
about performance pay for teachers and administrators. Until recently, teacher salary policies have
given low priority to any consideration of merit pay, generally viewing it as a small add-on to salaries. As
such, it was generally viewed as an add-on to the basic pay system and one of the first items to be
eliminated at any sign of budget pressure (see, for example, Cohen and Murnane (1986)). In this
context, it is useful to understand the value of keeping high quality teachers as it provides some bounds
on the funding of potential pay policies to attract and retain effective teachers.
Estimates of the relevant achievement and pay-off parameters are in fact available in the

literature. Moreover, the key parameters have been consistently estimated across different studies and
with considerable precision. The innovation of this paper is to draw on those parameter estimates to
produce plausible ranges for the underlying demand for teacher quality.
This paper begins with discussion of an overview of what is known about the relationship
between teacher quality and student achievement. It then discusses the policy alternatives that have
been pursued as a motivation for considering performance based policies. The central part of the paper


3
Interestingly, these discussions have occurred over a long period of time. See Kershaw and McKean (1962).
4
The one possible exception is attention to teachers lacking full certification. On the other hand, teacher
certification has not been shown to be closely related to student achievement; see, for example, Goldhaber and
Brewer (2000), Kane, Rockoff, and Staiger (2008), and Boyd et al. (2008).
3

is consideration of the derived demand for teachers that comes from their impact on economic
outcomes.
The Central Importance of Teachers

Literally hundreds of research studies have focused on the importance of teachers for student
achievement. Two key findings emerge. First, teachers are very important; no other measured aspect
of schools is nearly as important in determining student achievement. Second, it has not been possible
to identify any specific characteristics of teachers that are reliably related to student outcomes.
Understanding these findings is central to the subsequent discussions of policies and their underlying
economics.
The general finding about the importance of teachers comes from the fact that the average
gains in learning across classrooms, even classrooms within the same school, are very different.
5
Some

teachers year after year produce bigger gains in student learning than other teachers. The magnitude of
the differences is truly large, with some teachers producing 1½ years of gain in achievement in an
academic year while others with equivalent students produce only ½ year of gain.
6
In other words, two
students starting at the same level of achievement can know vastly different amounts at the end of a
single academic year due solely to the teacher to which they are assigned. If a bad year is compounded
by other bad years, it may not be possible for the student to recover.
No other attribute of schools comes close to having this much influence on student
achievement. The available estimates for, say, class size reduction do not suggest any leverage past the
earliest grades of school, and then the expected effects are small. Most of the controversy about the


5
A summary and evaluation of value-added studies that look at the influence of teachers on achievement gains is
found in Hanushek and Rivkin (2010b) and discussed more thoroughly below.
6
Hanushek (1992) finds differences of this magnitude for disadvantaged students found in Gary, Indiana. For an
overview of the results of similar studies, see Hanushek and Rivkin (2010b).
4

impacts of class size focus on whether there is any discernible impact on student achievement (see, for
example, Hanushek 1999; Ehrenberg, Brewer, Gamoran, and Willms 2001; Mishel and Rothstein 2002).
Much less attention has focused on the magnitude of any effects or the costs of any reductions. The
largest commonly available estimate for class size reduction comes from Project STAR, where Krueger
(1999) estimates that there is a one-time increase in achievement of approximately 0.22 standard
deviations from reducing class size by one-third. Clearly, reducing class size by this much (eight students
per class in the Tennessee STAR experiment) would be very expensive, and the comparison must be to
alternative policy approaches.
7

These issues come back into the discussion below.
The related issue is what makes for an effective or ineffective teacher. The extensive research
addressing this has found little that consistently distinguishes among teachers in their classroom
effectiveness. Most documented has been the finding that master’s degrees bear no consistent
relationship with student achievement (See Hanushek and Rivkin 2004, 2006). But other findings are
equally as interesting and important. The amount of experience in the classroom – with the exception
of the first few years – also bears no relationship to performance. On average, a teacher with five years
experience is as effective as a teacher with 25 years of experience. But, this general result about
measured characteristics of teachers goes even deeper. When studied, most evidence indicates that
conventional teacher certification, source of teacher training, or salary level are not systematically
related to the amount of learning that goes on in the classroom. For example, two recent high quality
studies of different preparation and entry routes into teaching compare the impact on student
achievement of Teach for America (TFA) and other alternative routes into teaching with traditional


7
Krueger (1999) provides an economic analysis of class size reduction, suggesting that it is marginally cost-
effective. These estimates can be compared to the estimates for teacher quality provided below.
5

teacher training (Boyd et al. 2006 and Kane, Rockoff, and Staiger 2008).
8
They find little differences by
teacher training background.
The exception as noted is that during the first one to three years of teacher experience the
typical teacher will get better at her job (see, for example, Staiger and Rockoff 2010). She will develop
her craft, learn her tasks, learn classroom management, and find ways to help students learn. The
existing evidence does not, however, suggest any clear way to provide this experience before entry into
the classroom or to reduce the adjustments that will need to be made once in the classroom. For
example, changes in teacher preparation or more extensive induction and mentoring programs, while

plausibly effective policies, have yet to be shown to significantly alter the early career learning of
teachers.
9
Similarly, even very intensive professional development to help teachers become more
effective after they are already in the classroom has shown little impact on student achievement.
10

The fundamental impact of teacher quality has led many policy makers to focus on the
implications for the form and level of pay of teachers. The most common expression of this focus is that
we should pay sufficient salaries to ensure that there are high quality teachers in all classrooms.
11

Higher salaries are viewed as a way of providing incentives to attract and retain the teacher force that
we need as a country. This conclusion, however, is not as straightforward as it sounds, given the current
structure of schools and labor markets for teachers and given limitations on understanding of how to
identify effective teachers.


8
Teach for America has attracted a large amount of attention for its ability to attract very high quality entrants
from the most competitive U.S. colleges and universities (see below).
9
See the experiments in Isenberg et al. (2009). This study compares a comprehensive induction and mentoring
program to “business as usual” and finds no gains.
10
Garet et al. (2008) and Garet et al. (2010) present results of randomized evaluations of intensive professional
development programs for early reading and for middle school math, respectively. Neither finds that this
professional development even when combined with classroom coaching significantly affects student learning.
11
In an international context, see for example Dolton and Marcenaro-Gutierrez (2011).

6

Problems with Current Teacher Policies

Existing policies on the demand side of the teacher labor market combine regulations on entry into the
profession and political bargaining over salaries. These policies have not proved effective in ensuring
uniformly high quality teachers, and there is little evidence that the extensions of these that have been
proposed will be more effective.
Most discussion of teacher policies includes very limited attention to costs except where salary
is itself the focus of discussion. In these latter discussions of salaries, moreover, little attention is given
to teacher effectiveness. Performance pay has not received extensive evaluation, because the limited
use of such schemes has until recently constrained researchers’ ability to study alternative pay systems.
Information about alternative performance pay approaches is beginning to be accumulated.
The use of performance pay has been increasing in the United States (Podgursky and Springer 2007).
This increased interest has also led both to experimental studies (Springer et al. 2010). Additionally,
international experimentation has led to more recent analyses (see, for example, Lavy 2009 and
Muralidharan and Sundararaman 2009). For a direct cross-country analysis assessing the impact of
different institutions, see Woessmann (2010). Given the level of activity in this area, information about
the supply side of the market is likely to increase rapidly, but for now still remains rudimentary.
Current Certification Policies
Today’s teacher policies begin almost everywhere with regulating who can enter teaching through a
certification process that specifies entry requirements.
12
Yet, existing evidence indicates that using
regulatory approaches to obtaining “good teachers” is extraordinarily difficult, if not impossible. The
analyses of teacher characteristics give us little reason to believe that we know enough about consistent


12
For a general discussion of teacher licensing and certification, see Goldhaber (2011).

7

characteristics or backgrounds of good teachers to set appropriate training and hiring standards.
Specifically, the underlying idea behind most certification requirements is that we can ensure that
nobody gets a bad teacher, i.e., that is possible to put a floor on quality. But doing this requires
knowledge of characteristics that systematically affect performance. As noted above, however,
credentials, degrees, experience, and even teacher test scores are not consistently correlated with
teaching skill.
13
Thus, requirements that only fully certified teachers can enter the classroom – such as
included in federal accountability legislation (No Child Left Behind Act, or NCLB)– may have little impact
on student performance, even if achieved.
Nonetheless, some policy proposals argue for strengthening credentials, i.e., for making the
standards higher and more rigorous. For example, some propose ensuring that all certified teachers
have a master’s degree (National Commission on Teaching and America's Future 1996). Indeed, five
states including New York currently require teachers to have an earned master’s degree in order to
receive permanent certification; an additional 11 states require master’s for optional advanced licenses (
National Council on Teacher Quality 2009). But, since past evidence shows teachers with a master’s
degree are not on average more effective than teachers lacking such a degree, these proposals would
raise the cost of becoming a teacher without a strong expectation that quality would improve.
Heightened screens for entry into teaching are also likely to be very costly. Tightening up on
entry requirements typically involves increased undergraduate course requirements, perhaps
requirements for a master’s degree before entering into teaching, and higher test score requirements
for entry into teacher training or for certification. Each of these makes entry into teaching relatively
more costly. Other things equal, this would reduce the supply of potential teachers by altering choices


13
Some attention has focused on teacher test scores as a potential indicator of teacher quality. The existing
empirical evidence suggests that these scores, when available, are more correlated with student achievement than

other explicit measures of teacher characteristics (Hanushek 2003). Nonetheless, the relationship is modest with
less than half of the estimated parameters of teacher tests on student outcomes being statistically significant and
with little of the underlying variation in teacher effectiveness being accounted for by test scores.
8

among existing potential teachers. Of course salary increases could offset any alterations in supply. The
magnitude of the needed increase would depend on the responsiveness of prospective teachers to
salary changes – something about which we currently have only rudimentary knowledge.
A variety of experiments with alternative routes to teaching have gone beyond traditional
certification. Indeed, a large portion of current teachers do not come through traditional teacher
training institutions (Walsh and Jacobs 2007). While these programs and their requirements vary
widely, they do open the door to a broader range of individuals. The existing evidence on their success
or failure is nonetheless limited. Some evidence does come from the Teach for America (TFA) program
that recruits high performing graduates from generally elite colleges and universities and places them in
hard-to-staff schools even though they lack traditional preparation and certification.
14
Three careful
studies of the performance of the TFA teachers show generally positive results for math and equal
results for reading when compared to traditionally trained teachers (see Raymond, Fletcher, and Luque
2001; Decker, Mayer, and Glazerman 2004; Xu, Hannaway, and Taylor 2009). Further, Boyd et al. (2006)
and Kane, Rockoff, and Staiger (2008) compare New York City teachers who entered through different
routes including Teach for America and other alternative certification programs and find little average
difference in effectiveness.
15
These results do, however, cast further doubt on the idea of improving
teacher quality by building on the existing certification requirements.
Current Salary Policies

The second important aspect of teacher labor markets is compensation. Standard economic models
suggest that, in a competitive economy, individuals’ salaries will generally be aligned to their

productivity. If one firm does not pay a worker a salary that matches her value in terms of output,


14
For a description of the program, see
15
Kane, Rockoff, and Staiger (2008) additionally provide some idea of the cost trade-off of different teacher
selection policies. Staiger and Rockoff (2010) evaluate much more stringent retention programs based on value-
added information.
9

another competitive firm would pay that amount. If the firm pays the worker too much for her value, it
will not be competitive with other firms and will be prone to going out of business.
Teacher labor markets, however, differ. Salaries are determined by collective bargaining
between teachers’ organizations and their employing school districts. School districts are not prone to
going out of business if they pay the wrong amount.
16
Being public activities, schools are always subject
to political forces, and the goals for school quality depend on governmental decision making about how
much quality is desired. As a result, teacher salary decisions are only partially driven by the economic
forces that underlie salary determination in private, competitive industries. Demand for school quality
is filtered through the political process and may or may not accurately represent the true benefits and
costs of varying amounts of quality, including possible externalities from quality.
17

Perhaps the most notable recent pattern in teacher salaries is that they have fallen dramatically
in relation to the rest of the economy. The changing position of teachers is clear in salary trends since
the beginning of World War II. Compared to the earnings of male college graduates, the average male
teacher was slightly above the 50
th

percentile in 1940. The average female teacher was close to the 70
th

percentile among college-educated females. But then male teachers fell precipitously to the bottom
third of the earnings distribution for college graduates, and female teachers were below average during
the 1960s and close to the relative male position by 1990. In 2000, less than 30 percent of young males
and less than 40 percent of young females with a bachelor’s degree earned less than the average
teacher (age 20-29).
18
(Note, however, that these data do not include deferred compensation for
teachers, which appears to have grown faster in teaching than in private sector employment; Podgursky
2011).


16
Additionally, there are questions about whether the negotiations between school boards and teacher unions are
arms-length transactions. See the various discussions in Howell (2005) and particularly Moe (2005).
17
The public demand considerations are also influenced by the fact that aggregate importance of school quality
appears to exceed the private benefits – probably reflecting externalities through the development of ideas that
influence economic growth. See Hanushek and Woessmann (2008, 2010).
18
Hanushek and Rivkin (2006).
10

This decline in salaries is mirrored by other measures. While it is somewhat difficult to trace
general measures of achievement and ability over time, it appears that teachers are drawn from deeper
in the group of people going to college and that the best college graduates are not the ones going into
teaching.
19

Some analysts have focused on the current position of teachers in the wage/ability distribution
as a fundamental issue driving student outcomes. Barber and Mourshed (2007), for example, identify
the fact that Finland and South Korea attract top graduates into teaching as a key ingredient to their
success on international tests. The source of this recruiting success is, however, unclear, because
Finnish teachers are not paid high salaries (though Korean teachers are). Mourshed, Chijioke, and
Barber (2010) further emphasize the importance of high level recruitment in their analysis of school
systems around the world that have shown substantial improvement.
The costs of returning U.S. teachers to their former position in the salary structure are clearly
enormous. While some have suggested that this would be a reasonable policy, no analysis is available to
indicate what gains in teacher quality would result.
Two factors appear to be important in evaluating these salary trends. First, by most accounts
the skills needed to be an effective teacher are not necessarily those needed to be successful elsewhere
in the economy.
20
While there is uncertainty in this statement because we do not have any clear
description of what skills are needed to be an effective teacher, we do not find for example that



19
Hanushek and Pace (1995), Corcoran, Evans, and Schwab (2002), Bacolod (2007).
20
The relative earnings of teachers who leave teaching has not been thoroughly investigated. Scafidi, Sjoquist, and
Stinebrickner (2006) suggest that teachers do not in general move to higher paying jobs when they leave teaching.
On the other hand, Chingos and West (2009) find that more effective teachers are likely to leave for better jobs.
11

standard measures of teacher achievement or ability are closely related to student outcomes even
though it is closely related to earnings elsewhere in the economy.

21

Second, the current structure of teacher pay enters into the political determination of salaries
and appears to hold down teacher salaries. The single salary structure that pays all teachers (with the
same experience and degree level) the same amount, quite likely, acts to restrain the pay of teachers.
The argument from a very simple political economy model, while not fully tested, is straightforward.
Since salary contracts are negotiated politically with little discipline from the market, politicians
negotiating salaries must be able to defend the idea that salary increases are related to improved
student outcomes. But, under the single salary schedule, teachers (with the same experience and
graduate training) receive the same pay and increase, regardless of the teacher’s effectiveness. This
situation makes large salary increases difficult because the factors that determine pay are unrelated to
teacher effectiveness in the classroom, and effective teachers would see the same salary increases as
ineffective teachers.
Certainly higher levels of salaries would tend to increase the pool of potential teachers, but the
impact of that on overall teacher quality depends on the ability of principals and human resource teams
in districts to choose the best teachers. Existing evidence, while not definitive, suggests that schools are
not very effective at choosing the best teachers among the pool of eligible applicants (Ballou (1996),
Ballou and Podgursky (1997), Staiger and Rockoff (2010)).
A variant of policy discussions about salaries is to argue that the right way to set the salaries of
teachers is to use the market salary for professionals in the open economy as a guide. At its heart this is
simply one notion of how to determine a salary level, but it is generally unrelated to any arguments


21
The relationship between measures of teacher test scores and student achievement proves to be very imprecise,
with teacher tests generally being statistically insignificant in educational production functions and with variations
in teacher tests explaining little of the variance in teacher effectiveness; see Hanushek (2003). At the same time,
as discussed below, there are strong rewards to individual achievement in the general labor market.
12

about the productivity of people in alternative occupations or about the relative attractiveness of
different occupations. To the extent that the overall compensation levels of teachers would be raised
by such calibration to other professions without affecting the distribution of pay across teachers, it is
subject to the same questions as the previous arguments about restoring relative pay.
There is one aspect of this that has specific relevance, however. It is unclear precisely which
professional occupations would provide the appropriate comparison. If the standard is privately
employed professionals – say, lawyers, doctors, and accountants in private employment – a feature of
the comparison is the overall structure of employment. Most private professionals have their salaries
set much more in line with their individual productivity, so that these occupations have much large
discrepancies in salaries and have noticeably higher employment risks than are found in teaching. Thus,
even if the comparison set of alternative professions were clear, the appropriate way to compare
salaries under different employment conditions is not.
A significant feature of virtually all existing discussions of teacher salaries, however, is the
absence of any linkage to quality as seen through student outcomes. Certainly discussions of quality are
used to motivate salary considerations, but little of the existing analysis is very relevant.
What is the Economic Value of Quality Teachers?

An alternative way to think of the salaries for teachers is to consider the derived demand for quality
teachers, because that is a way to assess the range of salary options politicians might reasonably
consider. The simplest way to value effective teachers is to note that the demand for teachers can be
derived from the demand for their product – educated students. For the most part, teacher demand
has never been evaluated in terms of the potential gains for students, implied by the economic value of
13

better performance. Such evaluations, however, provide some idea of the social value of highly
effective teachers, even if they do not necessarily pinpoint the efficacy of particular salary structures.
22

The Demand Side Based on Expected Student Earnings

Consider the economic returns to a student that follow having greater cognitive skills. In fact, these
returns have been frequently estimated through empirical analyses of the earnings gains from increased
skills. The most common estimation begins with a standard Mincer earnings model with the addition of
a measure of cognitive skills (CS) such as:
(1)
2
0 1 2
ln
i i i i i i
Y rS Exper Exper CS
    
     

where
i
Y
is earnings of individual i, S is school attainment, Exper is potential labor market experience,
and

is a random error. When cognitive skills are standardized to mean zero and standard deviation of
one,

is interpreted simply as the percentage increase in annual earnings that can be attributable to a
one standard deviation increase in achievement. This will understate the full impact of achievement to
the extent that higher achievement leads to higher levels of schooling, but that is generally not
considered.
23

Three parallel U.S. studies provide very consistent estimates of the impact of test performance
on earnings (


) for young workers (Mulligan 1999; Murnane, Willett, Duhaldeborde, and Tyler 2000;
Lazear 2003). These studies employ different nationally representative data sets that follow students
after they leave school and enter the labor force. When scores are standardized, they suggest that one


22
Chetty et al. (2010) note the analogy to pay for CEOs, where their ability to create or destroy significant value
does not dictate the optimal form of contract incentives.
23
Murnane, Willett, Duhaldeborde, and Tyler (2000) is an exception for tracing through the indirect effects. See
also the discussion of the form of estimation in Hanushek and Zhang (2009).
14

standard deviation increase in mathematics performance at the end of high school translates into 10-15
percent higher annual earnings.
24

Murnane, Willett, Duhaldeborde, and Tyler (2000) provide evidence from the High School and
Beyond and the National Longitudinal Survey of the High School Class of 1972 (NLS72). Their estimates
suggest that males obtain a 15 percent increase and females a 10 percent increase per standard
deviation of test performance. Lazear (2003), relying on a somewhat younger sample from National
Educational Longitudinal Study of 1988 (NELS88), provides a single estimate of 12 percent. These
estimates are also very close to those in Mulligan (1999), who finds 11 percent for the normalized AFQT
score in the National Longitudinal Study of Youth (NLSY) data. Note that these returns can be thought of
as how much earnings would increase with higher skills every year throughout the persons’ working
career. The estimates do, however, come early in the worker’s career, suggesting the impact may
actually rise with experience.
25

Altonji and Pierret (2001) consider the possibility of statistical discrimination that leads to
increased returns to cognitive skills over time. Specifically, when young workers first go to an employer,
it is difficult for the employer to judge the skills of the worker. Over time, the employer can more
accurately assess the skills of the worker, and, if worker skills are related to cognitive skills as measured
by the tests, the returns to test scores will rise with experience. Their analysis supports the idea that
these estimated returns to skills could be an understatement, with the returns to cognitive skills rising
and the returns to school attainment falling with labor market experience. When the model was tested


24
It is convenient to convert test scores into measures of the distribution of achievement across the population. A
separate review of the normalized impact of measured cognitive skills on earnings by Bowles, Gintis, and Osborne
(2001) finds that the mean estimate is only 0.07, or slightly over half of the specific studies here.
25
These estimates are derived from observations at a point in time. Over the past few decades, the returns to skill
have risen. If these trends continue, the estimates may understate the lifetime value of skills to individuals. On
the other hand, the trends themselves could change in the opposite direction. For an indication of the competing
forces over a long period, see Goldin and Katz (2008).
15

across countries, however, it seemed most important for the United States but not for other countries
(see Hanushek and Zhang 2009).
In a different set of estimates using data on a sample of workers for the U.S., Hanushek and
Zhang (2009) provide estimates of returns (

) of 20 percent per standard deviation. One distinguishing
feature of these estimates is that they come for a sample of workers throughout the career, as opposed
to the prior estimates that all come from early-career earnings.
26

Using yet another methodology that relies upon international test scores and immigrants into
the U.S., Hanushek and Woessmann (2009) obtain an estimate of 14 percent per standard deviation.
That analysis begins with a standard Mincer earnings model but estimates the returns to skills from a
difference-in-differences formulation based on whether the immigrant was educated in the home
country or in the United States. They find that skills measured by international math and science tests
from each immigrant’s home country are significant in explaining earnings within the United States.
Finally, Chetty et al. (2010) look at how kindergarten test scores affect earnings at age 25-27 and
find an increase of 18 percent per standard deviation. These estimates do not control for any
intervening school attainment differences but do control for a rich set of parental characteristics.
The finding that moving a standard deviation in cognitive skills yields 10-20 percent higher
income may sound small, but these increments apply throughout the lifetime. In 2010, the average
present value of income for fulltime, full-year workers age 25-70 is $1.16 million.
27
Thus, one standard
deviation higher performance even at a low return of 13 percent per standard deviation amounts to
over $150,000.


26
The data from the International Assessment of Adult Literacy

(IALS) provide both tests of reading and numeracy
skills but also assess a range of adult workers. The estimates in

Hanushek and Zhang (2009) come, like the
previously mentioned studies, from adding cognitive skills to a standard Mincer earnings function. But that paper
also discusses alternative ways to obtain estimates of the schooling gradient (r in equation (1)).

27
Calculations use average income by age for all fulltime, full-year workers in the labor force in the first quarter of

2010. It is assumed that incomes rise 1 percent per year because of overall productivity improvements in the
economy and that future incomes are discounted at 3 percent.
16

These estimates of the labor market returns to higher cognitive skills can be merged with
evidence about variation in teacher effectiveness to calculate the derived demand for teacher quality.
The basic approach to estimating teacher effectiveness begins with a model of student achievement (A)
for student i in grade g as a function of lagged achievement, a fixed effect for each teacher (
j

), and
other factors (X) that might affect performance as in:
(2)
1
(1 )
it it j i it
A A X
   

    

A central issue in past estimation has been identifying the standard deviation of teacher
effectiveness from variations in
j

. A key additional parameter is

, which indicates the depreciation
rate on prior learning, because this indicates how much of the learning attributable to a teacher carries
over after the student leaves the classroom.

Hanushek and Rivkin (2010b) review recent estimates of the standard deviation in teacher
quality (
w

), and their estimates are reproduced in Table 1.
28
These estimates, however, look at the
variations in teacher effectiveness found within schools (hence the subscript w) and do not include any
differences between schools.
29
The average within school variation in recent studies is 0.17 s.d. for
math and 0.13 s.d. for reading. The focus on within school variance reflects a concern about identifying
teacher quality as opposed to unobserved differences among students and families who have selected
their school, largely through residential location.
For the subsequent estimation of the impact of teacher quality, an estimate of the total
variation of quality (
T

) is used. In reality, because of difficulties in identifying the between-school
variance in quality, the subsequent analysis relies on bounds the plausible values of total variation. A


28
Estimation of

is actually done in a variety of ways and frequently makes some effort to eliminate biases and
measurement error. See Hanushek and Rivkin (2010b).
29
Note that all estimates are corrected for measurement error and, except for Kane and Staiger (2008), rely on just
the within school variation in teacher effectiveness.

17

lower bound of 0.2 s.d. is used and is matched with a plausible upper bound of 0.3 s.d.
30
In this, teacher
effectiveness is measured in terms of standard deviations of student achievement. Thus, a teacher who
is one standard deviation above the mean to the distribution of teachers in terms of quality (i.e.,
comparing the 84
th
percentile teacher to the 50
th
percentile teacher) is estimated to produce marginal
learning gains of 0.2-0.3 standard deviations of student achievement compared to the average
teacher.
31

As a base case, consider a teacher who is 0.5 s.d. above average in the teacher effectiveness
distribution (i.e., at the 69
th
percentile), and this level of effectiveness is maintained across school years.
She would, according to the above estimates, annually lead to a 0.1 s.d. average improvement in
cognitive skills of her students (assuming that the standard deviation of teacher effectiveness in units of
student achievement is 0.2 s.d.).
The implication for earnings depends on the persistence of this learning into the future and how
this increased learning in any given year carries through into the labor market. The baseline calculations
presume that 70 percent of the added learning persists into the future, i.e., that

in Equation (2) is 0.3.

The 70 percent persistence of the annual growth in achievement comes from standard estimates of
depreciation of learning in educational production functions, but this is subject to uncertainty. First, the
estimates of

can be directly influenced by differences in tests across grades, by test measurement
errors, and other nonlearning matters. Second, while estimates of

are not always reported in the
relevant empirical literature, there is a clear distribution of estimates in the literature.

=0.3 is roughly
consistent with estimates in Hanushek (1971, 1992), Armor et al. (1976), and Boyd et al. (2006).
Hanushek, Kain, and Rivkin (2009) find estimates closer to 0.4. Kane and Staiger (2008) find estimates of
depreciation near 0.5 (with large standard errors) for math, but lower in language arts. The estimates of


30
Comparisons of estimated variations within and between schools can be found in Hanushek and Rivkin (2010a).
31
In terms of the student achievement distribution, this would move a student from the 50
th
percentile to the 58
th

to 62
nd
percentile.